Log in to view the full article
Labor & the 5 Percent Factor
The biggest risk and opportunity to make or lose money is labor. Let's look at a typical job breakdown to see what happens if labor runs over budget by 5 percent. These numbers are for a general contractor, but the concept is the same for any construction-related contractor
Typical Construction Contract Budget
Most construction companies only make an average annual net profit between 2-3 percent. If you can improve your labor costs by only 5 percent, you can improve your net profit amount to 4-5 percent, which can mean a 100 percent increase in your bottom line.
In the example above, improving labor costs by 5 percent increases net profits to $7,000, a 5 percent to 7 percent gain. And if you improve your labor by 10 percent, your net profit increases to $9,000, or from 5 percent to 9 percent net profit. This is real money that will allow you to invest back into the company.
However, going over the labor budget by just 5 percent will put you $2,000 over budget and reduce your profit margin to $3,000, a 3 percent net profit. If you overrun your labor by 10 percent, your net profit will shrink to $1,000.
Is Your Crew Working Efficiently?
Consider how productive your crew is every day out in the field. Studies of typical construction field crews show there is much room for improvement. Employees start late, quit early, extend their breaks to smoke or make personal cell phone calls. They're waiting for deliveries when they run out of materials. Studies show that one-third of the day is wasted goofing off or standing around, while actual work takes up only two-thirds of an 8-hour work day.
So where do you start to improve productivity? It starts with identifying the areas that take away from your crew's efficiency. Some things that hurt your field productivity include: trips to the hardware store, tools breaking or not working properly, having the wrong equipment for the job, smoking while working, making phone calls, not starting on time and quitting early.
Win the Race!
For a good model to follow, watch a NASCAR pit crew. Every second could cost a team millions of dollars, so a pit crew has to be fast and super-efficient.
When you don't focus on speed, you're allowing your crews to go with the flow. To get your team focused on speed, start every project by getting the supervisor and crew together to brainstorm how they can improve delays.
If they need inspiration, explain to them how going just 5 percent faster will translate into dollars and will keep your company competitive in the marketplace. For example:
Poor Production Equals Poor Profits
Take a hard look at your crew's start, break, lunch, and quitting times. Does your crew stay until the actual end of the day or do they start trickling out early? For a 20 person crew, every minute you lose per day costs you as much as $2,500 per year or more.
Introduce Incentives to Spur Efficiency
Years ago in July, I went to the job site to get an update from my foreman. He told me it would take until Thanksgiving to finish the next step of the project. Baloney. I felt that 20-man crew could get the work done much faster, so I asked them how they arrived at that date. They told me they thought that date was "doable" and they could easily make it happen.
I didn't like their answer, so I asked if they could finish a few weeks faster. He squirmed and didn't want to answer or commit. Then I asked if he could finish by Oct. 25 if I offered a $1,000 incentive. In less than ten seconds, he said he could make the faster Oct. 25 date. And he did, in fact, make the new date. It cost me $1,000, but saved me from paying 20 men for 15 days of work. What savings you make shaving time off the turnaround will snowball through the rest of the project.
Trash Your Old Tools
Field workers tend to use old, broken or bandaged tools and equipment rather than admit to the boss that they might be broken or worn out. How much money are old unproductive tools or broken down equipment costing you?
The added benefits of having quality tools and great equipment will be increased crew teamwork, improved morale, more pride of workmanship, better quality, fewer mistakes, safer projects and greater efficiency.
Double Your Profits
Call an all-crew team meeting and discuss ways to improve your schedule, define the exact amount of hours the job should take, create meaningful incentives and improve your tools and equipment.
Strive to implement the 5 percent factor-it's less expensive than advertising (it's free!), it won't have you taking on more jobs than manageable and, most importantly, it can save your business money.
